Safety of Vanguard Federal Money Market Fund (VMFXX)

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Closer2323
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Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by Closer2323 » Fri Mar 13, 2020 2:47 pm

What conditions would need to exist for the Vanguard Federal Money Market Fund (VMFXX) to have issues? Currently have a lump sum parked there from the sale of a business and just wanted to get your opinion on whether there are better options currently. It's a large enough sum that it would challenging to do CD's across several banks.

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David Jay
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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by David Jay » Fri Mar 13, 2020 2:51 pm

Closer2323 wrote:
Fri Mar 13, 2020 2:47 pm
What conditions would need to exist for the Vanguard Federal Money Market Fund (VMFXX) to have issues?
An extinction-level meteor impact. A solar flare that destroys the electrical grid of the entire world. An unrestricted nuclear war.

That’s about all I can come up with...
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delamer
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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by delamer » Fri Mar 13, 2020 2:52 pm

What do you mean by “issues?”

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Closer2323
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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by Closer2323 » Fri Mar 13, 2020 2:56 pm

delamer wrote:
Fri Mar 13, 2020 2:52 pm
What do you mean by “issues?”
I would say any level of volatility. Another question related to this as it relates to parking larger sums of money is there any other similar risk level suggestions that would be better or alternative options?

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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by Grt2bOutdoors » Fri Mar 13, 2020 3:03 pm

Closer2323 wrote:
Fri Mar 13, 2020 2:56 pm
delamer wrote:
Fri Mar 13, 2020 2:52 pm
What do you mean by “issues?”
I would say any level of volatility. Another question related to this as it relates to parking larger sums of money is there any other similar risk level suggestions that would be better or alternative options?
Vanguard Treasury Money Market Fund - at least 80% US Treasury Bills, no repurchase agreements.
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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by greg24 » Fri Mar 13, 2020 3:09 pm

As close to safe as you can get in today's world.

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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by Iridium » Fri Mar 13, 2020 3:17 pm

If short term interest rates suddenly jumped 6%, that might be enough to cause the fund to break the buck. Otherwise, I think one would have to speculate on the legislative/executive branches through action or inaction deliberately throwing federal debt into default.

Overall, that money market is about as safe as it comes if you cannot stay under the FDIC limit. Money markets in general have been extremely low risk. The highest profile failure resulted in a 0.9% loss to investors, and regulations have gotten considerably more strict since then. Also, every failure I can think of was heavily invested in commercial paper and other private debt, I am not sure there has ever been an issue with any money market focused on government bonds.

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How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by CULater » Sat Mar 14, 2020 9:11 am

I'm holding a bunch of money right now in Vanguard's brokerage sweep fund, VMFXX. The composition of this fund is:

18.7% Repo Agreements
49% U.S. Govt Obligations
32.3% Treasury Bills

How safe is this fund? There's been some issues in the repo market lately which are questionable. Also, what the heck are U.S. Govt obligations? Wondering if it would make sense to move these funds to BIL or some other fund/ETF that invests only in Treasury bills.
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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by z3r0c00l » Sat Mar 14, 2020 9:12 am

About as a safe as it gets, you are briefly lending money to the people who 'print' the money and get tax revenue. They can just 'print' more money to pay you back, and apparently they are 'printing' $1.5 trillion as we speak. Scare quotes aside, I have no doubt MM funds will do just fine going forward. Defaulting on government debt of this sort would end our economy and therefore you would be worried not about the fund at that time, but how to get your next meal.

Obligations are bonds, bills, and other government debt securities. Not sure why they break bills out in this breakdown and I think bills would fit into the general term. Maybe they use these three buckets to represent three different time-spans (very short, short, and kinda short.)

These tend not to fluctuate much with interest rate changes and this fund seeks to maintain $1 per share, but the real risk here is losing money to inflation. Then again, I see this kind of thing as basically cash so you don't expect to get much return.

VMFXX is much safer (volatility wise) than BIL. Look at the price chart, VMFXX is super boring because it is just $1 every day. BIL is VERY steady compared to longer bonds, but it will go up and down a few basis points each day. The bills might pay more, however even that is up in the air right now. Overall risk must take into account inflation and the longer duration funds might help you beat inflation.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by dkturner » Sat Mar 14, 2020 9:31 am

CULater wrote:
Sat Mar 14, 2020 9:11 am
I'm holding a bunch of money right now in Vanguard's brokerage sweep fund, VMFXX. The composition of this fund is:

18.7% Repo Agreements
49% U.S. Govt Obligations
32.3% Treasury Bills

How safe is this fund? There's been some issues in the repo market lately which are questionable. Also, what the heck are U.S. Govt obligations? Wondering if it would make sense to move these funds to BIL or some other fund/ETF that invests only in Treasury bills.
In your Vanguard brokerage account you can purchase shares of the Vanguard Treasury Money Market Fund (VUSXX). It has a minimum purchase amount of $50,000. It only invests in U.S. Treasury securities. No repos. No government obligations.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by CULater » Sat Mar 14, 2020 9:44 am

dkturner wrote:
Sat Mar 14, 2020 9:31 am
CULater wrote:
Sat Mar 14, 2020 9:11 am
I'm holding a bunch of money right now in Vanguard's brokerage sweep fund, VMFXX. The composition of this fund is:

18.7% Repo Agreements
49% U.S. Govt Obligations
32.3% Treasury Bills

How safe is this fund? There's been some issues in the repo market lately which are questionable. Also, what the heck are U.S. Govt obligations? Wondering if it would make sense to move these funds to BIL or some other fund/ETF that invests only in Treasury bills.
In your Vanguard brokerage account you can purchase shares of the Vanguard Treasury Money Market Fund (VUSXX). It has a minimum purchase amount of $50,000. It only invests in U.S. Treasury securities. No repos. No government obligations.
Just checked it and it seems to have about 13% in government obligations. No repos though.
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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by increment » Sat Mar 14, 2020 10:01 am

CULater wrote:
Sat Mar 14, 2020 9:11 am
Also, what the heck are U.S. Govt obligations?
In the Annual and Semi-Annual Reports Vanguard lists the holdings (as of some date months ago). They seem to mean loans to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
Last edited by increment on Sun Mar 15, 2020 1:14 pm, edited 1 time in total.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by JackoC » Sat Mar 14, 2020 10:11 am

z3r0c00l wrote:
Sat Mar 14, 2020 9:12 am


Obligations are bonds, bills, and other government debt securities. Not sure why they break bills out in this breakdown and I think bills would fit into the general term. Maybe they use these three buckets to represent three different time-spans (very short, short, and kinda short.)
'Govt obligations' in this fund mainly refers to securities issued by agencies in some way 'sponsored' by the federal govt, but generally not explicitly guaranteed by the federal govt. This is generally stated in the fund prospectus:
"Although these securities are high-quality, most of the securities held by the Fund are
neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of
the U.S. government"
https://advisors.vanguard.com/pub/Pdf/sp33.pdf

As per Increment's post, annual reports show most of the 'govt obligations' are things like Fannie Mae, Federal Home Loan Bank, Freddie Mac etc Discount Notes, which the market views as implicitly supported by the federal govt. but which aren't explicitly gteed.
http://www.vanguard.com/funds/reports/q300.pdf

The T-bills are separated out because those are the govt's own direct debt explicitly backed by its full faith and credit. Repo of course refers to what are essentially short term loans collateralized by treasuries. The borrowers are generally not govt entities, but the credit risk is pretty much limited to the risk the collateral value oscillates to slightly below the loan value, then the repo counterparty fails, a relatively unlikely scenario and very unlikely to result in a net loss of a large % of the loan amount if it happened.

As mentioned, VUSXX is purely composed of T-bills. Its credit quality is slightly higher than the already excellent quality of VMFXX, and it typically yields a bit less before tax. However since virtually all the interest on VUSXX is not subject to state income tax, while ~27% of the interest from VMFXX was for example in 2019, VUSXX can yield slightly more on an after tax basis in high tax states. It typically does for us and is therefore strictly superior to VMFXX. But, in a plunging short rate environment highest yielding bank accounts often significantly beat MM funds, in the past couple of years' rising short rate environment we could only beat VUSXX by constantly jumping around from bank to bank, we judged not worth it. 'Pretty close to top' bank rates were below VUSXX after tax. Now with the fed funds rate likely to go close to zero from this coming week, 'pretty close to top' savings accounts may again handily beat VUSXX after tax, as they usually did in the previous zero rate period.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by CULater » Sat Mar 14, 2020 10:18 am

JackoC wrote:
Sat Mar 14, 2020 10:11 am
z3r0c00l wrote:
Sat Mar 14, 2020 9:12 am


Obligations are bonds, bills, and other government debt securities. Not sure why they break bills out in this breakdown and I think bills would fit into the general term. Maybe they use these three buckets to represent three different time-spans (very short, short, and kinda short.)
'Govt obligations' in this fund mainly refers to securities issued by agencies in some way 'sponsored' by the federal govt, but generally not explicitly guaranteed by the federal govt. This is generally stated in the fund prospectus:
"Although these securities are high-quality, most of the securities held by the Fund are
neither guaranteed by the U.S. Treasury nor supported by the full faith and credit of
the U.S. government"
https://advisors.vanguard.com/pub/Pdf/sp33.pdf

As per Increment's post, annual reports show most of the 'govt obligations' are things like Fannie Mae, Federal Home Loan Bank, Freddie Mac etc Discount Notes, which the market views as implicitly supported by the federal govt. but which aren't explicitly gteed.
http://www.vanguard.com/funds/reports/q300.pdf

The T-bills are separated out because those are the govt's own direct debt explicitly backed by its full faith and credit. Repo of course refers to what are essentially short term loans collateralized by treasuries. The borrowers are generally not govt entities, but the credit risk is pretty much limited to the risk the collateral value oscillates to slightly below the loan value, then the repo counterparty fails, a relatively unlikely scenario and very unlikely to result in a net loss of a large % of the loan amount if it happened.

As mentioned, VUSXX is purely composed of T-bills. Its credit quality is slightly higher than the already excellent quality of VMFXX, and it typically yields a bit less before tax. However since virtually all the interest on VUSXX is not subject to state income tax, while ~27% of the interest from VMFXX was for example in 2019, VUSXX can yield slightly more on an after tax basis in high tax states. It typically does for us and is therefore strictly superior to VMFXX. But, in a plunging short rate environment highest yielding bank accounts often significantly beat MM funds, in the past couple of years' rising short rate environment we could only beat VUSXX by constantly jumping around from bank to bank, we judged not worth it. 'Pretty close to top' bank rates were below VUSXX after tax. Now with the fed funds rate likely to go close to zero from this coming week, 'pretty close to top' savings accounts may again handily beat VUSXX after tax, as they usually did in the previous zero rate period.
Very informative analysis. Thank you.
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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by Chicken Little » Sat Mar 14, 2020 10:51 am

JackoC wrote:
Sat Mar 14, 2020 10:11 am
As mentioned, VUSXX is purely composed of T-bills.
Website says VUSXX has 13% obligations, as mentioned above. Is that correct?

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by JackoC » Sat Mar 14, 2020 11:20 am

Chicken Little wrote:
Sat Mar 14, 2020 10:51 am
JackoC wrote:
Sat Mar 14, 2020 10:11 am
As mentioned, VUSXX is purely composed of T-bills.
Website says VUSXX has 13% obligations, as mentioned above. Is that correct?
Vanguard's site says so, so almost surely correct or was very recently. I shot from the hip saying VUSXX is all T-bill, sorry. It often is I believe. But the prospectus only requires 80% to be. For example last year ~98% of the interest on VUSXX was state tax free, year before IIRC it was 100%. Those 'govt obligations' (agency Discount Notes etc) are the part that's not state tax free.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by increment » Sat Mar 14, 2020 11:30 am

JackoC wrote:
Sat Mar 14, 2020 11:20 am
I shot from the hip saying VUSXX is all T-bill, sorry. It often is I believe. But the prospectus only requires 80% to be. For example last year ~98% of the interest on VUSXX was state tax free, year before IIRC it was 100%. Those 'govt obligations' (agency Discount Notes etc) are the part that's not state tax free.
This seems to vary. A 24-year old memo from New York says that Federal Home Loan Bank interest was (state-)tax-free, but the Fannies and Freddies would be taxed. (Is there any connection to the likelihood of the federal government preventing default on these loans?)

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by garlandwhizzer » Sat Mar 14, 2020 11:35 am

I personally believe that all of Vanguard's MMF are about as safe as safe gets. I am not personally concerned about loss of principal in any of them especially those with the backing of the federal government that can print money. MMF security is critical to the functioning of our economy as financial institutions and individuals need constant access to short term safe credit. As in the 2008 crisis, the government has no choice but to offer to back up the $1 principal value of these securities if they are threatened by economic catastrophe, even as with Prime MMF they are not directly government obligations. If investors and financial institutions lose confidence and cannot count on the security of MMF as reliable, the entire economy will rather quickly implode. The government realizes this. There are many things in investing worth worrying about but this is not one of them IMO. There's a reason that Vanguard rates all their MMF at 1 on a scale of 1 to 5. Notice in the recent market turmoil which hit essentially all bonds at one time or another with yield and principal volatility that MMF were unfazed.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by JackoC » Sat Mar 14, 2020 11:41 am

increment wrote:
Sat Mar 14, 2020 11:30 am
JackoC wrote:
Sat Mar 14, 2020 11:20 am
I shot from the hip saying VUSXX is all T-bill, sorry. It often is I believe. But the prospectus only requires 80% to be. For example last year ~98% of the interest on VUSXX was state tax free, year before IIRC it was 100%. Those 'govt obligations' (agency Discount Notes etc) are the part that's not state tax free.
This seems to vary. A 24-year old memo from New York says that Federal Home Loan Bank interest was (state-)tax-free, but the Fannies and Freddies would be taxed. (Is there any connection to the likelihood of the federal government preventing default on these loans?)
Another good correction, thanks. Here's a 2018 list of what is state tax exempt and not among agencies
https://www.rbcwm-usa.com/resources/file-687493.pdf
I don't believe there's a direct correlation to degree of govt support. Note how GNMA is 'full faith' but interest on its obligations is state taxable, whereas among the apparent typical major components of VMFXX Freddie/Fannie are 'implied backing''/non-exempt, FHLB (besides a number of smaller ones) is 'implied backing'/exempt.

I also agree of course with immediately preceding post, the credit risk difference between VMFXX and VUSXX is small. However given the actual yields and state tax exempt %'s reported by Vanguard, VUSXX can easily come out slightly higher in after tax yield, so slightly less risk for slightly more return. The only reason to turn that down is VMFXX being the 'settlement fund' on Vang bro accounts and another few clicks to hold stuff in VUSXX.

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Re: How safe is Vanguard Federal MM fund (VMFXX) during these times?

Post by abuss368 » Sat Mar 14, 2020 11:54 am

I would tune it out as you are fine. We have Prime money market and sleep well. Money markets from Vanguard survived the financial crisis and this is not a financial crisis.
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Re: Safety of Vanguard Federal Money Market Fund (VMFXX)

Post by Misenplace » Sat Mar 14, 2020 12:49 pm

This thread has been merged into the pre-existing thread on the same topic in Personal Investments.

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